Department of Labor fiduciary rule
Survey results on industry preparedness
In the year since the Department of Labor (DOL) proposed the “Conflict of Interest” Rule (the Rule) that would require investment advice to retirement investors to adhere to strict fiduciary standards, the industry has begun preparing for the Rule’s enactment. With the proposed Rule currently under review by the Office of Management and Budget, many firms expect to see a final version of the Rule in the coming weeks. In this context, this paper represents the results of a survey of 27 financial services firms that was conducted to gain a better understanding of industry preparedness for the Rule. Unless otherwise indicated, all percentages reflected are based on questions which received responses from the full survey population of 27 respondents.
Preparation is underway, but key challenges remain
The survey revealed wide variations in preparedness among respondents. However, all survey respondents view adoption of the Rule as imminent and all firms have taken some steps to prepare. Notably, only 55 percent of firms call their preparation work “significant” and only 8 percent of firms have actually moved from preparation to implementation activities as they await issuance of the final Rule.
Composition of survey respondents
The surveyed firms include many of the industry's largest private client firms, as well as drawing responses from a subset of the industry's small and middle-market firms. These firms engage in a broad and diverse set of businesses that includes broker-dealers, investment advisers, dually registered broker-dealers/investment advisers, mutual fund manufacturers, retirement plan service providers, trust service providers, variable annuity manufacturers, technology providers, and third-party administrators.
Many respondents have substantial businesses that serve the retirement investor marketplace. Almost two-thirds of respondents1 reported that their firms earn $1 billion or more in annual revenues from businesses that are directly impacted by the Rule. Additionally, over 95 percent of respondents2 indicated that a quarter or more of the customer assets held with them would be considered retirement assets and therefore impacted by the Rule.
Variations in preparedness among respondents
All of the respondents indicated that they view the adoption of the Rule as imminent, with no respondent planning for the Rule to not be enacted. Despite this universal agreement amongst respondents, the survey revealed differences in preparedness for the Rule.
- 55 percent of respondents indicated they have undertaken significant planning activities to date
- 41 percent of respondents indicated they are awaiting Rule finalization before taking significant action
- Only one respondent (4 percent) indicated the Rule is unlikely to have an impact on their company’s business
The majority of preparatory actions are still in a planning or in-progress state, with few respondents reporting any preparation activities to be fully completed.
- 923 percent of respondents are in the process of or have completed some form of public policy advocacy activities specific to the Rule (e.g. lobbying, involvement with trade groups)
- 78 percent of respondents are still in the process of developing an understanding of the Rule
- 89 percent of respondents are still in the process of educating internal stakeholders about the Rule
- Around 75 percent of respondents are still in the process of conducting a Rule impact analysis, identifying strategic options, and performing scenario planning
Almost all respondents are in the process of planning for implementation (e.g., roadmaps, budgets), however, only two respondents have begun to actually implement changes in preparation for the Rule.
Varying estimates of Rule related costs
544 percent of the respondents have yet to conduct a budgeting exercise for actions related to the Rule. Among firms that have completed budgets, cost estimates vary, but 42 percent have budgeted $25 million or more.
Broad usage of exemptions
Nearly 75% of respondents anticipate using at least one of the existing or new exemptions provided by the DOL, whether they use one of the many current class exemptions or current statutory exemptions, or have their own individual exemption, or look to a new exemption (e.g., the Best Interest Contract and/or Principal Transaction Exemptions), while only one respondent (4%) does not plan to rely on exemptions. The remaining 22% of respondents were unsure if they would rely on an exemption.
Range of compliance, product, and business model responses to the Rule
More than half of the respondents indicated they are considering at least one of four approaches to compliance with the Rule:
- 85 percent of respondents are considering adopting fee leveling
- 85 percent of respondents are considering increasing their emphasis on fee-based advisory programs
- 63 percent of respondents are considering adopting a robotic advice platform
- 59 percent of respondents are weighing the creation of a direct-to-customer model
In addition to the approaches outlined above, 33 percent of respondents indicated they were considering moving away from smaller accounts and 15 percent of respondents are evaluating other approaches, including:
- Utilization of digital advice software
- Creation of a small account solution
- Reliance on the counterparty exception and prohibited transaction exemption 84-24
Only one firm (4 percent) believes no change is necessary to their business approach based on the Rule.
3 Based on survey question receiving a response from 26 respondents
4 Based on survey question receiving a response from 26 respondents
What it all means
The industry will likely need to implement substantial changes to support the anticipated widespread adoption of exemptions as well migrating to different or new service models and offerings. The industry’s capacity to support this amount of change all at once under what is anticipated to be an accelerated timeline will be challenging. As the industry awaits the final rule, the next few weeks may prove critical to organizations to complete their planning and organizing activities so that once the final rule is published they can quickly finalize their compliance and business approaches and begin implementation activities.